This paper presents a simple boundedly rational model of a firm and consumer behavior. We formulate an entry game, where every firm decides on investing in R&D for inventing a new product that will appeal to certain group of consumers. The success depends on the amount of funds available for the project as well as firm's familiarity with the relevant proportion of taste space. We identify the section of parameter space where firms have an incentive to horizontally diversify. In this section the model results in rich industrial dynamics. Equilibrium firm size distributions are heavy tailed and skewed to the right. The heaviness of the tail depends on one industry-level parameter.